Research and analysis

Australia economy: falling commodity prices take gloss off solid growth

Published 23 September 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk - Australia

1. This publication was archived on 4 July 2016

1.1 This article is no longer current. Please refer to Overseas Business Risk - Australia

1.2 Summary

Australia records solid economic growth above 3% despite a soft June quarter. The required rebalancing of growth away from the slowing mining sector appears underway, although falling commodity prices and rising unemployment are of concern. Treasurer Hockey says the economy is on track.

1.3 Detail

Official GDP data released 3 September revealed the Australian economy grew just 0.5% in the June quarter, less than half March-quarter growth but enough to deliver a solid 3.1% for the 2013-14 financial year.

Volatility in resources exports is behind an apparent dip in growth. Mining detracted from growth last quarter for the first time in years as a massive four-year mining investment boom winds down, key commodity prices fall, and export volumes could not match the very strong March quarter.

A much-wanted lift in domestic demand, persistently under-strength since 2012, is tentatively showing through. Rises in home construction and household spending outweighed falls in public-sector spending and business investment. A rebalancing of growth away from the mining sector to the wider economy is gradually taking shape.

Unemployment rising

Unemployment, falling commodity prices and climbing house prices are the chief concerns.

Slowing domestic demand over the last 18 months in the 85% of the economy not hitched to mining has seen the jobless rate reach 6.1% as at August. There are hopes the peak is not far off, but the central bank has unemployment stuck around 6% until 2016 as thousands of workers drift home from the north-west gas and mining construction projects looking for work.

Official interest rates remain at a record low 2.5% with the central bank governor making clear monetary policy work is done. Cutting rates further to reduce unemployment and “further inflating an already elevated level of house prices would seem an unwise route”. Inflation is well contained at 2.8%. However, CPI declines from repeal of the carbon tax may be smaller than anticipated.

Income hit

In real terms, the numbers show an economy growing nicely. But real measures of GDP growth tell an incomplete story. Nominal GDP growth, measuring national income, is much weaker than average, driven lower by falling iron-ore and coal prices. Australia is shipping ever higher resources volumes but is earning less and less income for each unit. And a currency historically tied to commodity prices has not yet adjusted down to compensate. This is keeping a lid on domestic demand. Corporate profits fell last quarter. Businesses are reluctant to invest and employ, hampering the growth transition.

There are offsetting positives. Wage growth is low at 1% in real terms in 2013-14, helping competitiveness after a decade of solid wage increases during the resources boom. Firms’ renewed focus on costs and efficiency sees labour productivity continuing to recover.

Challenge ahead

The big economy question is ‘ can Australia lock in a transition in growth away from falling mining investment to other hitherto lethargic sectors without a big dip in between?’ By 2016, when the big LNG, coal and iron-ore projects are done, the rest of the economy will need to stand on its own two feet again.

Economists are broadly agreed the chances are looking better. Firstly, the mining exports slump last quarter doesn’t change the long view: the enormous addition to extraction capacity has begun a long-term lift in exports, particularly iron ore and coal. This will go some way to offsetting falling investment in the sector. Secondly, reading through the quarterly volatility this year, the economy has been running at its long-term trend pace for the last year and looks set to stay there through 2014. The main risk is further falls in commodity prices.

Hockey relieved

Treasurer Joe Hockey welcomed “a pleasing set of numbers” as evidence of building momentum. He says his economic strategy is on track, pointing to successful repeal of the carbon and mining taxes, budget repair underway, Japan and Korea FTAs done, and the “biggest infrastructure programme in modern Australian history” kicking in from 2015.

1.4 Comment

Australia’s economy continues to move along at a rate many advanced economies would grab with both hands. There is understandable concern over a listless non-mining economy and growth being carried by the resources sector, but the Government has breathing space in which to tackle fiscal consolidation and rebalancing growth.

1.5 Disclaimer

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